A lesson in charting — great trendlines often begin at a price gap

S&Ps are in a very well-defined price channel — a decline toward 1900 is possible

Beginners in the art of price charting desire to draw trendlines and boundary lines using orthodox high and low prices. Experienced chartists learn that charting is a much more nuanced craft.

The S&P futures market serves as a case in point.

Novice chartists would draw a trendline using the Nov 2012 orthodox low. However, trendlines are often born from important price gaps. The Jan 2, 2013 gap in S&P futures stands as a daily, weekly, monthly and yearly breakaway gap. Thus, a trendline is best drawn using this gap, not the Nov 2012 low.

On a daily chart, the S&P futures have been advancing within the boundaries of a 19-month price channel. Prices are finding resistance at the upper end of this price channel. Should the upper boundary turn prices down, the most likely support would be the lower channel line in the price zone of 1895 to 1905 (box). Interestingly, the 1895 level was significant resistance from Mar through May 2014. Often times, resistance, once penetrated, becomes support. This is NOT a prediction of a price decline to 1900. Personally, I think too many market participants are expecting a price correction for one to happen. Yet, a trader must constantly be prepared for a variety of scenarios.

In my opinion (not worth much), the key to the S&Ps will be found int he NYSE Composite Index. $NYA is forming a well-defined H&S top pattern. A decisive close below 10,880 would complete this top and leave the S&Ps vulnerable for a decline to 1900.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Peter Brandt entered the commodity trading business in 1976 with ContiCommodity Services, a division of Continental Grain Company. From his start in the commodity industry, Peter's goal was to trade proprietary funds. But, he first needed to learn the business. More »

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